An Economic Recovery Program—Theirs vs. Mine
Photo by Phil Pasquini/Shutterstock.com
The coronavirus has been wrecking the U.S. and global economies. While focus has been on addressing the biological devastation wrought by the virus, the economic devastation keeps growing.
Failure to properly address the deepening economic impact of the coronavirus has been no less shocking to date than the obvious failure of politicians and policymakers to get a handle on the medical-human impact of the virus.
Trump had called the virus a “hoax,” said it would be over by April, declared publicly there were millions of test kits being used when there weren’t, and blamed first the Chinese and then the Europeans for the obvious spread of the virus, and rising death toll, in the U.S.
His answer thus far to the spreading and deepening economic impact of the disease has been to demand U.S. Federal Reserve bank chair, Jay Powell, drop interest rates further, plus advocate a payroll tax cut across the board—the latter a measure that economists almost unanimously say will have no stimulus effect on the economy. Even his own advisers, Steve Mnuchin and Larry Kudlow, reportedly have advised against the payroll tax cut. The payroll tax cut was first enacted under Obama to try to stimulate consumption in the wake of the last 2008 economic crash. It is generally acknowledged not to have had much, if any, effect on economic recovery.
How the Virus is Crushing the Economy
There are at least four major “channels of contagion” by which the virus is driving the contraction of the U.S. and global economy:
1. Global Supply Chain Disruption
This was the easiest to see. Intermediate and final goods exported from China to the U.S. were halted in many industries. U.S. production began to cut back on the dlivery of final goods in the U.S. economy, already affected by Trump’s trade war with China during 2018-19. And not only goods from China to U.S. directly, but supply chains in which Japan and South Korean goods, made in China and delivered to those countries, would otherwise be shipped to the U.S. Or goods shipped to Mexico and then exported as final goods to the U.S. Or from Asia to Europe, and then to the U.S. The net effect was a significant drop in U.S. production and therefore in sales and the output of the U.S. economy in general. But that channel of contagion is now being dwarfed by another.
2. Collapsing U.S. Consumer Demand
We can see this now spreading and deepening rapidly throughout the U.S. economy. First, demand for travel related spending—airlines, cruise and shipping, hotels and leisure, entertainment, etc.—were initially impacted. But that’s been spreading to other industries as rapidly as the virus itself. Personal services of all kind are coming to a halt, except for healthcare. Restaurants and bars are shutting down. Education is being driven to an online underground. Malls and stores are virtually deserted. Social entertainment, including sports, is suspended everywhere. Even grocery stores are experiencing empty shelves, and consumption in basic necessities will soon fall off. Then there’s online purchasing, now developing huge backlog and delivery problems.
The consumption sector is coming to a halt in industry after industry, and it’s not over yet. Social distancing required by the virus to slow its spread is, conversely, accelerating the spread of the economic impact.
Consumption was the only sector of the U.S. economy in late 2019 holding it up. And it was slowing in that regard as well by year-end. Now it is collapsing. Nearly 70 percent of the U.S. GDP and economy, it is now joining the contraction in business investment and trade that was occurring throughout 2019.
The recession is here, as of March 2020. The only real question now is how deep will it go and how long will it last. And that question depends, in turn, on how quickly and seriously U.S. politicians will respond. And the actions thus far do not portend well for a prompt “v-shape” recovery.
But there is yet a third channel of economic contagion emerging that may dwarf the effect of the supply chain disruption and household consumer demand collapse. It is the condition of the financial system itself.
Photo by Motortion Films/Shutterstock.com
3. Financial Markets Deflation & Default
Globally and in the U.S., financial markets are churning and fracturing, with a net effect already of having deflated by more than 20 percent and in some cases 30 percent or more. Not just stock markets, but oil and commodity futures markets, foreign exchange currency markets, corporate bond markets, which are far more important to capitalist economies than stock markets, are showing signs of great stress, to put it mildly. Especially unstable are markets for what’s called junk bonds (particularly in oil fracking, retail, and travel and leisure). And what’s called “junk loans”—i.e. leveraged loans. In the U.S., the combined total at risk is more than $7 trillion. Add to that the fact that banks globally are sitting on $10 trillion in non-performing loans. Should prices collapse further, widespread defaults on paying principal and interest on debt will take place. That will result in mass layoffs once again, as in 2008-09; a further collapse of business investment; and a yet further acceleration of contraction of the real economy.
It’s not coincidental that the U.S. central bank, the Federal Reserve, last week pumped an extra $1.5 trillion into the banks via what’s called the Repo market, plus more through traditional bond channels, and is planning in a couple days this coming week to drop interest rates to near zero and re-institute special funding once again, as in 2008, to bail out mutual funds and other “shadow” (i.e. unregulated) banks. Why? Because liquidity is rapidly drying up throughout the economy as businesses draw down their bank credit lines to zero as well, in order to hoard cash to weather out the storm of consumption and production collapse on the horizon.
The financial markets collapse, the third channel, may prove to have the greatest devastation on the recession now already hitting the U.S. economy. What began as supply chain and household demand problems will be greatly exacerbated by the financial instability.
Is Trump preparing for this economic contingency? No, not at all. Here’s what Trump, and even the Democrat leadership (Pelosi-Shumer), is proposing:
Trump’s Failed Economic Stimulus “Program”
In the middle of last week Trump addressed the nation on TV and proposed the weakest possible response. It was so weak even investors reacted with a 2,200 point fall in the stock market. There were basically three things Trump proposed:
First, a $50 billion increase in the small business administration loan fund. Second, a hint of some kind of tax deferral extending the normal IRS April 15 deadline. And, third, a payroll tax cut costing the Social Security trust fund a hit of at least $800 billion.
He then revisited that paltry proposal on Friday, March 14, when he proposed an apparent additional $50 billion for the states to spend on emergency measures to address the spreading virus. He clarified that the tax deferral would be only for “some,” not all. He added a suspension of interest on student debt, but failed to explain if that meant a full waiver of debt for all students, or just a temporary halt to paying interest, which would nonetheless continue to accumulate and for which students would still have to pay later, after the suspension was lifted. Trump also added the proposal that the U.S. would buy more oil from U.S. producers to fill the U.S. strategic reserve. That was to help oil companies experiencing revenue loss from oil prices falling to the low $30s per barrel. Trump’s statements to the press indicated he still wanted the payroll tax cut, even as the Democrats were saying “no way,” it wouldn’t have any effect except to further destroy social security funding.
Pelosi & Democrats Blocked Stimulus Program
As Trump was prevaricating and dribbling out minimalist economic responses to the cratering U.S. economy, Pelosi and the Democrats were trying to address the real scope of the problem, even if not as broadly required.
Intense discussions were being held behind the scenes between Pelosi and Trump’s Treasury Secretary, Steve Mnuchin. All that came out of that negotiation by Friday, March 14, however, was an agreement to provide free testing of the virus. But how “free” was not clearly defined. Did that mean those that were sick would have to pay out of pocket and then get reimbursed by the government? If so, millions will hold off getting tested. More than half of U.S. households have less than $400 for emergencies, according to the Federal Reserve’s own data research. They can’t afford to get tested.
Pelosi and the Democrats have also been proposing paid medical leave of 14 days, tax credits to small business to help pay for the leave, and an increase in unemployment benefit payments for those who are curently not sick, but could soon be laid off or asked by their employers to stay home (on unpaid medical leave). Pelosi and company, to their credit, also refused to cut payroll taxes. They know of Trump’s leaked plans to cut Social Security and Medicare after the November elections.
While there are some good provisions in Pelosi’s proposals, the Democrat economic stimulus doesn’t go far enough to address the scope and magnitude of the negative economic impact that’s coming to the U.S. economy: as it shuts down in broad industries and should the financial system crack, as it did in 2008.
Furthermore, it appears that both Trump and McConnell in the Senate are intent on doing their worst to refuse to agree on most of the proposals in the Pelosi plan; demanding in particular acceptance of a payroll tax cut in exchange for other proposals. So don’t expect anything big or effective in any agreement coming this week. Trump seems determined not to have an effective fiscal stimulus, now that his budget deficit last year exceeded $1 trillion—and now that his current budget deficit after only five months is running at a rate of $1.4 trillion for this year.
An economic stimulus must focus on government spending and income restoration. It cannot focus on tax cutting. Nor on interest rate reduction. Neither of those kinds of policies will stimulate investment or consumption. Why? Because there’s a massive shift to hoarding cash already underway by business, and consumers will not get relief quickly enough, or at all if they’re unemployed.
Businesses are selling their financial assets across the board to gather in as much cash as possible, needed to continue to pay interest and principal on its $10 trillion debt run up since 2008, as its prices, sales and revenue drop precipitously in the meantime. There’s a “dash for cash” underway. And no amount of tax cutting will lead to re-investing in production. The tax cuts will simply be hoarded and not spent. Ditto for households and consumers. Any payroll tax cut will be hoarded, not spent, to ensure households have enough to continue paying mortgages and car loans and student loans—assuming they still have jobs. If no jobs, it will be spent on trying to maintain current consumption, not increase it.
Photo by Phil Pasquini/Shutterstock.com
The same applies to interest rate reductions by the Fed. Why will businesses borrow—even at a lower rate—to expand production, when consumers are buying less of their goods or if they can’t get parts from abroad with which to build the goods? And why would households borrow to take the risk to purchase a new auto or even a new home given the current direction of the economy? Cutting the costs of business investment is now the least important variable determining the outcome of investment. Expectations of a collapsing economy and thus falling profitability is what’s driving investment now—and the anxiety of being able to continue to pay for debt accumulated in recent years in order to avoid default.
Yet that’s what exactly Trump will propose: more tax cuts, for business especially, and lower interest rates. It will prove to be throwing money down a rathole.
My Proposal for Economic Stimulus & Recovery
Make no mistake, the U.S. is now in recession. And it will deepen considerably before it is over. Moreover, the great risk is now a spreading crisis of credit, a fracturing of the financial system as in 2008-09, and the potential emergence of another “Great Recession,” this time even worse than 2008-09. All the efforts by the Federal Reserve and other central banks to pump trillions of dollars more into the U.S. and their economies may prove futile this time around.
What’s needed is an immediate restoration of consumer household spending power and a protective floor under incomes that may soon also collapse should mass layoffs emerge once again in another couple months. Here’s some measures, a necessary short list, expanding on some of my earlier proposals, to provide that immediate income effect:
I. Paid Medical Leave
A 14-day paid medical leave until vaccines for the virus are generally available, with eligibility for:
those tested with virus
those with symptoms
all those Parents of K-8 students forced to remain home due to school closures
The 14-day paid leave should be renewable by state legislatures’ decision since the economic impact, nor the recovery from the virus, will not occur evenly across all states.
II. Company Reimbursement for Paid Medical Leave
Paid Medical Leave costs should be reimbursed by the federal government to companies with fewer than 500 workers. Reimbursement by tax credits for companies with more than 50 employees; and by means of direct subsidy payments for companies with fewer than 50.
50 percent reimbursement to companies with more than 500 workers by means of tax credits provided the company shows a full restoration of jobs for those laid off within a year of the development of a vaccine for the virus.
Paid leave shall not result in a reduction of paid sick leave provisions already provided by a company or by union contracts, which shall otherwise remain accrued to workers
III. Employment Guarantees
Employers are required to restore workers on paid medical leave who return to their former position with the same pay and benefits.
All other benefits shall continue to accrue for workers while on paid medical leave
IV. Hospital Testing & Related Costs
Costs for hospital-clinic-doctor office entry and testing will be billed by the health provider directly to the government, not paid by the worker and then reimbursed
Provider costs associated with the visit for testing (i.e. labs, emergency or other room charges, out patient, in patient, etc.) will similarly be billed by the provider to the government
Return or follow up visits, if needed, will be billed directly as well
Pharmacy and drug costs are to be waived for patients determined to be infected by the virus, and all their immediate dependents under age 21, or on Medicare, Medicaid, or otherwise uninsured.
V. Health Insurance Companies Responsibility
If a worker is insured and on medical leave, or if otherwise laid off due to the economic effects of the virus on their company of primary employment, the health insurance provider shall waive the worker’s share of monthly health insurance premiums. This shall apply as well as for their immediate dependents covered by the company’s insurance benefits program
If a worker is insured, or if otherwise unemployed due to the economic effects of the virus on their company of primary employment, the health benefits insurance provider will waive all deductibles and co-pays for services for those determined infected or on leave due to school shutdowns. This shall apply as well as for their immediate dependents covered by the company’s insurance benefits program
Premiums, deductibles, co-pays and coverage shall remain frozen until the state legislature declares the virus effect is declared over
State legislatures shall review all insurance company requests to raise rates after the virus effect is over for the next 3 years. Attempts to recoup costs during the virus period by accelerating price increases or reducing coverage will be denied if greater than the rise in the local consumer price index for the urban region.
VI. Medicare & Medicaid
For those employed while receiving Medicare coverage, the monthly Medicare deductible payment shall be waived until the vaccine for the virus is made available
For those employed while receiving Medicaid, all doctor or hospital costs to the employee or unemployed shall be paid for by the state’s Medicaid authority. All doctors and hospitals shall be required by law to accept Medicaid patients until the vaccine for the virus is made available
Refusal by doctors, hospitals or clinics to accept Medicare or Medicaid patients will result in fines levied on the health provider’s annual federal tax payment
VII. Unemployment Benefits
The federal government shall immediately extend unemployment benefits for all layoffs for an additional six months (one year total), effective as of March 1. 2020
Companies shall be required to continue to pay unemployment benefits taxes to their states for laid off workers for up to a year, commencing March 1, 2020.
There shall be no suspension of the Social Security 6.2 percent payroll tax or the Medicare 1.45 percent tax.
VIII. General Company Requirements
For the duration of the virus crisis period, companies shall be required to continue to pay their workers’ health insurance monthly premiums if laid off, for a period of six months from date of initial lay off
Banks shall be required to provide lending to business customers at interest rates no greater than the original loan, if extended; or for an initial loan, no more than the average rate for the local urban area in which the company is located
Banks and mortgage companies shall immediately institute a moratorium on mortgage payments for those on paid medical leave, or for those laid off for economic reasons associated with the effects of the virus on their company for a period of three months or until returning to work, whichever is sooner
Auto companies’ financial services, credit unions’ auto financing, and other sources of financing of vehicles shall introduce a moratorium on monthly auto loan payments for those on medical leave, or for those laid off for economic reasons associated with the effeect of the virus on their company for a period of three months or until returning to work, whichever is sooner
IX. Federal Student Loans & School Districts
For college students who work, but are laid off due to economic effects associated with the virus at the company or institution for which they work, student loan principal and interest payments shall be suspended until returning to work. Suspension shall be defined as permanent waiver of all interest charges. Such interest payments shall not further accrue.
School districts that shut down shall continue to receive per pupil reimbursement from their states on the same schedule as when students were attending sessions
X. Food Provisioning & Delivery System
K-8 students who were receiving meals while in attendance at their school, but are not so doing due to school shutdown, shall continue to have meals delivered to their primary residence daily. State programs providing ‘meals on wheels’ for elderly residents or similar programs shall be expanded to cover K-8 students
All former cuts to the SNAP (food stamp) program since January 2017 shall be restored for all those eligible on paid medical leave, leave from work due to school shutdowns, receiving unemployment benefit payments, or on Medicare or Medicaid.
Federal and State governments shall undertake whatever measures necessary to ensure the physical delivery of food to local grocery outlets, and to remove bottlenecks to online ordering and delivery of food and necessary household items to residents or local distribution centers, including if necessary mobilization of state national guard units and temporary requisition of private delivery company facilities and equipment
Addendum to Financing My “Economic Recovery Program”
Some friends have asked how much my own fiscal-spending based “Economic Recovery Program” would cost? The total cost can’t be quantified precisely, as the impact on working families is spreading rapidly. But here’s some financing, administrating, and implementation principles associated with my proposal:
First, the amount of financing applied in the first phase should be no less than the same amount that the Federal Reserve bank has already allocated to spend on banks and investors. That’s $2.2 trillion in just the last week. So if we can spend that on the bankers, why can’t we allocate the same amount of funds to bail out workers and the middle class? Index that $2.2 trillion to whatever further increases the Fed spends on its pre-emptive bailout of bankers and investors already underway. If the Fed can “create $2.2 trillion” out of thin air to give to bankers and investors, why can’t it do the same for Main St. and working families?
Second, use some of these funds to enroll those without health insurance or whose insurance will not cover the costs of health services, apart from the actual tests only, in the Medicare system. Introduce a one-page sign-up for Medicare online. Create a special “temporary” membership category. Have healthcare providers bill Medicare for the cost of tests to workers, and for all other related costs, as well as costs for those on unpaid medical leave or unemployed due to the economic effects of the virus on the economy—i.e. economic layoffs. Immediately enroll the 30 million uninsured. Voluntarily enroll the 87 million who are underinsured with massive deductibles and copays, and other dependents who have no coverage, etc. Immediately allocate funds from the $2.2 trillion to bail out Main St. and transfer the allocated funds to the Medicare-Social Security Trust Fund. And hire as many workers in the Medicare administration as needed.
Third, instead of reimbursing companies for continuing paying wages to workers sent home on unpaid leave, or who are laid off because of the major economic impact that’s coming (there will be mass layoffs starting in May), have the government hire the laid off for the duration of the crisis—which Trump admitted will likely continue through August. Adapt the unemployment benefits system to make the payments to those so covered. This would be a 21st century, electronic-administered “Works Progress Administration” that provided 8 million government jobs to the unemployed.
The administrative apparatus is there already: Medicare and Unemployment Benefits. Why not use it? And make it clear that it is the government that is providing their health care and employment protection—not the private employers or bankers who would otherwise cut them loose to scramble individually to protect themselves and their families.
Fourth, immediately create a “Public Investment Corporation,” funded and managed by the government (Federal, State and Local) to invest in alternative energy expansion and other climate crisis mitigation that would hire workers, since the current crisis will mean private business investment will collapse across the board and such very much-needed investment from the private sector will not be forthcoming for some time.
Let the Federal Reserve preemptively bail out its bankers and billionaire private investors! But if they can spend $2.2 trillion on them, then the government can, and should, preemptively bail out Main St. as well.|
Further economic measures will be needed to address the current U.S. recession, and the increasing possibility of the recession morphing into another “Great Recession” (or worse). But the above represents an initial phase of immediate fiscal spending response in the short run to restore incomes being devastated right now. Z
Jack Rasmus is author of the recently published book, The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump, Clarity Press, January 2020. He blogs at jackrasmus.com and his twitter handle is @drjackrasmus. His website is http://kyklosproductions.com.